Europe’s Economy Edges Higher, Heading Off Forecasts of Recession

After a succession of crises, investors, economists and policymakers have begun grasping onto the brighter spots in Europe’s economy: a few weeks of warmer winter weather, lower natural gas prices, and an upturn in German investor sentiment.

Just a few months ago, governments were planning for power outages and gas rationing as the continent faced winter without Russian gas. Now, the headline rate of inflation appears to be at or past its peak and consumers have been surprisingly resilient to the economic turmoil.

“The big picture is less bad than we thought a few months ago,” said Frederik Ducrozet, the head of macroeconomic research at Pictet Wealth Management. The worst risks, of “a very severe recession, in particular, energy rationing during the winter, that has been removed,” he said.

For now, the imminent risk of recession has been forestalled. The eurozone economy grew 0.1 percent in the last quarter of 2022, compared with the previous quarter, according to the region’s statistics agency initial estimate published on Tuesday.

The latest data came hours after the International Monetary Fund raised its forecast for economic growth in the eurozone to 0.7 percent in 2023, from a prediction of 0.5 percent made in October. The small bump up was because the economy turned out better than expected last year, helped along by lower natural gas prices and government financial support to shield households from some of the rise in energy costs.

It was another small piece of good economic news to add to a modest pile. Already this month, the ZEW index of German investor sentiment turned positive for the first time since February 2022, before the war in Ukraine, and a measure of economic activity across the eurozone, the composite purchasing managers’ index, indicated that the economy was growing in January.

“The news has become much more positive in the last few weeks,” Christine Lagarde, the president of the European Central Bank, said earlier this month at the World Economic Forum annual meeting in Davos, Switzerland.

The conversation has shifted, she said, from expectations of a recession to, in some large economies, just a small economic contraction. However, she said the eurozone’s economy would significantly slow in 2023 from the previous year, adding “it’s not a brilliant year but it’s a lot better than we have feared.”

But with the war in Ukraine grinding on the optimism about Europe’s economy is extremely fragile.

The past year has been a “lesson in humility” when it comes to economic forecasting, said Mr. Ducrozet. He added that, looking at the data so far this year, “it doesn’t look so bad but it doesn’t look good either.”

On Monday, Germany reported that its economy unexpectedly contracted in the fourth quarter, putting Europe’s largest economy at risk of a recession.

This shows that “if there is a risk, it’s still the downside,” Mr. Ducrozet said. “Consumers were hit by the largest ever shock to real incomes since the Second World War because of this rise in inflation.”

This seems especially true in Britain, where earlier this month data showed the economy fared better than expected in November, eking out 0.1 percent of growth from the previous month. This means the country will probably avoiding an economic contraction over the fourth quarter, staving off a recession.

But that’s just for the time being. The outlook in Britain is particularly harsh and the I.M.F. downgraded its forecast for the economy, predicting a 0.6 percent decline in 2023, instead of 0.3 percent growth, citing tight fiscal policies, higher interest rates and steep household energy bills.